MARKET WATCH: Energy prices rebound ahead of Obama speech

Energy commodity prices rebounded strongly Sept. 7 with front-month crude approaching $90/bbl in intraday trade before closing with a 3.8% gain for the day in the New York market.

Some analysts said it was part of a broad-based market rally in anticipation of a $300 billion fiscal stimulus plan to be announced by President Barack Obama, but others reported energy prices were flat in early trading Sept. 8 because of uncertainty over Obama’s pending speech.

“Oil products were generally weaker than crude, resulting in a slight dip in refining margins,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Meanwhile, the term structure for West Texas Intermediate strengthened further in the absence of storage concerns at Cushing, Okla., and Brent structure was also firmer due to the continuously tight physical market.”

In Houston, analysts at Raymond James & Associates Inc. said, “Yesterday, German courts paved the way to allow [Germany’s] participation in the bailouts [of financially strapped members of the European Union], which sent the broader market rallying 2.4%.” The Oil Service Index and SIG Oil Exploration & Production Index (EPX) bounced back from losses in the previous session to lock in gains of 4.3% and 4.5%, respectively.

Initial hope pending Obama’s evening speech is unlikely to last long, however, as analysts evaluate political proposals against economic realities. The US Department of Labor reported Sept. 8 that first-time applications for unemployment benefits increased by 2,000 last week to a seasonally adjusted gain of 414,000 last week, indicated companies aren’t hiring in reaction to weak economic growth. Analysts said new applications need to fall below 375,000/week for sustainable job growth, a level not seen since February. Last week the government reported no net gain in US jobs during the month of August, the worse performance since September 2010 with the US unemployment rate remaining at 9.1% for the second consecutive month.

In his later speech before a joint session of Congress, Obama is expected to call for a $300 billion package that likely will include extensions of the payroll tax cut and long-term unemployment benefits, additional tax incentives for businesses that hire, and funding for public works projects.

Government officials said Hurricane Irene didn't affect job applications, but data from several states were delayed by the Labor Day holiday. As of midday Sept. 7, the Bureau of Ocean Energy Management, Regulation, and Enforcement said crews had not yet returned to 21 of the 617 manned production platforms and 4 of the 70 drilling rigs in the Gulf of Mexico in the wake of Tropical Storm Lee. They said 36.9% of normal oil production and 18.1% of gas production from the gulf remain shut in.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Production in the US gulf is gradually coming back and should be back to capacity by tomorrow. Production of 4.6 million bbl of crude has been delayed due to Tropical Storm Lee. The statistics published next week should be impacted by the closure of the Louisiana Offshore Oil Port Inc. [the only US deepwater facility for importing oil into the US] during the passage of Lee.”

Jobs proposal outlook

Meanwhile, analysts at FBR Capital Markets & Co., Arlington, Va., said Congress is expected to extend for 1-4 months the current highway bill and the associated 18.4¢/gal federal gasoline tax that finances the highway trust fund, prior to its Sept. 30 expiration.

“The primary obstacle to a long-term highway authorization is funding,” they said. “The federal gasoline tax currently collects about $35 billion, but revenue is not expected to keep up with construction costs. Raising the tax is politically unfeasible, and alternative proposals have also fallen flat.”

FBR analysts noted the White House has floated a 6-year, $556 billion approach to create jobs by rebuilding the aging US transportation infrastructure. “Given the funding limitations for infrastructure funding, the administration may propose ways to leverage more private-sector funding for infrastructure investment,” they said. “For example, the president has supported the idea of an infrastructure bank, and Barbara Boxer [D-Calif., who chairs the Senate committee on environment and public works] has supported expansion of the Transportation Infrastructure Finance and Innovation Act loan program. Likewise, the administration could seek to leverage infrastructure spending through greater tolling or public-private partnerships. An infrastructure bank could also fund transmission, telecommunications, or pipeline infrastructure projects.”

In other news, the US Federal Reserve Bank’s latest Summary of Commentary on Current Economic Conditions, or Beige Book, “was downbeat but perhaps not indicative of the sort of collapse in confidence that we have seen in some of the surveys,” Zhang reported. “There were no indications that recessions are imminent, but that might come in time.” Meanwhile, both the European Central Bank and Bank of England are to announce their rate decisions. “The market expects no rate change from either central bank, with a possibility that the BoE might introduce further easing measures to support the economy,” said Zhang.

US inventories

The Energy Information Administration said Sept. 8 commercial US crude fell 4 million bbl to 353.1 million bbl in the week ended Sept. 2. That was twice as big a drop as the Wall Street consensus, yet crude stocks remained above average for that time of year. Gasoline inventories increased by 200,000 bbl to 208.8 million bbl in the same period, counter to market expectation for a 1.4 million bbl fall. Finished gasoline inventories decreased while blending components inventories increased. Distillate fuel stocks increased by 700,000 bbl to 156.8 million bbl last week, outstripping the consensus for a 500,000 bbl rise.

Imports of crude into the US dropped by 1 million b/d to 8.6 million b/d last week, EIA reported. In the 4 weeks through Sept. 2, crude imports averaged 9.1 million b/d, down by 443,000 b/d from the comparable period in 2010. Gasoline imports averaged 597,000 b/d last week while distillate fuel imports averaged 152,000 b/d.

The input of crude into US refineries inched up by 6,000 b/d to 15.5 million b/d last week, with units operating at 89% of capacity. Gasoline production decreased to 9.2 million b/d while distillate fuel production was down to 4.5 million b/d. The oil inventory report was delayed this week because of the Labor Day holiday.

EIA also reported the injection of 64 bcf of natural gas into US underground storage in the week ended Sept. 2. That brought working gas in storage to more than 3 tcf. However, that was 131 bcf less than in the comparable week in 2010 and 60 bcf below the 5-year average.

Energy prices

The October contract for benchmark US sweet, light crudes jumped by $3.32 to $89.34/bbl Sept. 7 on the New York Mercantile Exchange. The November contract escalated $3.24 to $89.55/bbl. On the US spot market, WTI at Cushing was up $3.32 to $89.34/bbl.

Heating oil for October delivery continued climbing by 6.54¢ to $3.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, rebounded by 8.54¢ to $2.91/gal.

The October contract for natural gas inched up just 0.2¢, closing essentially unchanged at a rounded $3.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., remained unchanged, also at a rounded $3.94/MMbtu.

In London, the October IPE contract for North Sea Brent was up $2.91 to $115.80/bbl. Gas oil for September escalated by $27.50 to $966.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes shot up $3.01 to $111.33/bbl.